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Bonding curves play a pivotal role in the cryptocurrency and decentralized finance (DeFi) landscape. They represent mathematical curves that detail the relationship between the price and the supply of a specific token. At their core, bonding curves are about dynamic pricing.
The price of a token, as defined by a bonding curve, changes based on its current supply. As more tokens enter circulation due to purchases, their price rises according to the curve. Conversely, as tokens are sold and the supply decreases, the price drops.
This concept is closely tied to Automated Market Makers (AMMs). Traditional exchanges rely on order books, where the confluence of buy and sell orders dictates the price. In contrast, bonding curves set the price automatically based on a pre-established formula, essentially acting as an automated market maker. This ensures that there is always liquidity available.
Regardless of the situation on the market, as long as there’s collateral like ETH in the contract, users can buy or sell the token. It’s a departure from conventional exchanges where liquidity might be contingent on the depth of the order book.
On this podcast, I had the opportunity to discuss this topic with the Curious Rabbit who is actively researching this area!
Here are some of the links referenced in the interview
- BCRG Twitter: https://twitter.com/Bonding_Curves
Bonding curves, Web3.0 and Tokenomics
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